Are you a minority shareholder and feeling that a decision has been forced by the majority? Then the minority rule may help.
Majority v Minority
A majority shareholder is one who owns 50% or more of the shares in a company. This can be an individual or a group who have formed to pass a specific resolution. A minority shareholder is the opposite; anyone owning less than half of shares. The majority is Goliath to the minority’s David.
It’s normal for a single majority shareholder to exist in a limited company who happens to be the company director. However in a PLC there may be literally hundreds of shareholders all in the minority.
Your voting rights are your power as a shareholder. The number of votes an individual shareholder holds relates directly to the number of shares they own. It’s usual for one share to equal one vote, but different share types afford different voting rights, so please check yours.
For example, if you own 49 shares in a company with 100 shares, you would won 49 votes and 49% of the company. However, you don’t need to vote for every share you own – it is combined into one single paper and your percentage equated.
The powers of the shareholders in their decision making is ruled by the Majority Rule. So the decisive power lies with Goliath. The rule states that if there is a disagreement with regards to a particular decision once voted upon, then the majority shareholders will decide the outcome.
Therefore, in a situation where 50% of the vote is required to pass a resolution (Ordinary Resolution), a majority shareholder would be able to force this decision.
This rule has been extended to cover situations where the directors, who have the ultimate management of the company, refuse to take action in a case of irregularity of internal management. The majority shareholders can take action in the company’s name instead.
If you’re the David of the situation, it would seem that you have no power or control, but never fear - the law does offer you a handy metaphorical slingshot for protection.
A shareholder has the right not to be unfairly prejudiced (see Companies Act 2006 section 994(1)). Unfair prejudice arises when a shareholder believes that the conduct of the company’s affairs are affecting them unfairly. It usually arises in a situation where a director is also a majority shareholder and is using their joint roles to abuse their position. The courts decide a point of unfair prejudice, but it’s a lengthy and costly process where it’s vital to seek legal advice.
If you hold a 5% shareholding there are various options available to you with regards to your rights but these only act to provide you with an opportunity to voice your opinion, for example, the right to circulate a written resolution, request a general meeting or circulate a written statement at a general meeting. Whilst this will give you the opportunity to express your concerns, ultimately, if you can’t alter the opinion of the majority then the decision will remain in place.
Unfair prejudice is an intricate point of law but it's explained further on our Knowledge Hub.
The Shareholders’ Agreement
When you buy shares you should be provided with a shareholders’ agreement, which sets out the T&C’s of the shares you own.
The agreement may or may not offer contractual protection for the minority shareholder. It’s best to review the agreement if you feel that a decision is incorrect and you’re in the minority. Whilst you may have read this agreement when you purchased the shares, it’s always best to refresh your memory and check if the terms offer you any protection.
The Derivative Claim
Is the action being agreed to by the majority allowing a wrong to be committed against the company? If so, there may be an option to bring a Derivative Claim. This claim can only be brought on behalf the company and not on behalf of an individual shareholder. Any remedy rewarded would therefore be for the benefit of the company and not the petitioning shareholder.
An example of this would be where a director who is a majority shareholder has use their power to ratify any wrongdoing, in their role as a director, such as a breach of their director duties.
This is another complex point of law to be decided by the courts, and it’s vital to seek legal advice if you have suspicions that a case may have arisen.
Protect Your Minority Rights
Minority shareholders lie in a precarious world, in which it may feel that there is little recourse against the larger majority. It’s the atypical David and Goliath story, and whilst the law has sought to provide the metaphorical slingshot, this doesn’t always help you and in the long run it may be best to turn yourself into Goliath.
This can be done by ensuring your minority rights are protected in the shareholders’ agreement or to make your voice heard at a general meeting and generate support from your other shareholders to create a majority opinion and support for your view.